By all counts, it was a terrible week for the U.S. dollar. The greenback traded lower against all of the major currencies, causing the Dollar Index to fall by nearly 3%. While the move was driven by back-to-back weakness in US data and mixed comments from Federal Reserve officials, the dollar had become extremely overbought in a very short period of time and a correction is natural. Traders needed an excuse to take profits and this week’s disappointing consumer spending and housing market reports provided the perfect incentive. However in the coming week, we are looking for the dollar to bounce as the move in many currency pairs reach key technical levels. USD/JPY has found support near 118.50, while EUR/USD has found resistance at 1.0850 and GBP/USD above 1.50. In fact technical support is one of the main reasons why the dollar could recover in the coming week. The chart below shows that the slide in the dollar index stopped right at the 50-day SMA. The move down to key levels has attracted bargain hunters who share our view that the drivers for the long dollar trade remain intact. Even though some U.S. policymakers support a later rate hike, their comments suggest they all see the Fed tightening by September. Ten-year yields have also found support above 1.8% and on Friday there were positive surprises in U.S. data. Core consumer price growth accelerated on an annualized basis while the continued recovery drove consumer confidence as measured by the University of Michigan’s consumer sentiment index to its second strongest level since 2007. Next week’s U.S. calendar contains mostly second tier economic reports that should not have limited impact on the dollar. While we expect the dollar to bounce, we do not anticipate a resumption of the rally. Instead we look for most of the major currency pairs to remain within their recent range with durable goods, jobless claims, existing and new home sales supporting the consolidative price action. So in a nutshell, the 3 reasons why we believe the dollar could bounce next week are the following:

1. Long Term Dollar Drivers Remain Intact, Yields Find Support

2. Minor U.S. Data Next Week Should Pose No Threat to the Greenback

3. Dollar Index Finds Support at 50-day SMA

Euro Rollercoaster Ride

Last week the EUR/USD declined for 6 trading days in a row and this week it rose for 4 straight days. This back and forth price action that can also be seen on intraday charts has made FX traders dizzy. On one hand, EUR/USD is rising because of the decline in the U.S. dollar and on the other it has fallen because of negative Greek headlines. Apparently banking units in Southeastern Europe have been told to exit their Greek debt exposure. There was even talk that some of these calls are being made by Greek bank units. If true, it reflects an increased concern in Europe that Greece could default on its loans and/or exit the euro. As a sign of Europe’s reluctance to provide Greece with additional aid without a more detailed credible reform plan, German Finance Minister Schaebule said Greece is free to seek Russian aid even though they may not receive much. Stocks and bonds across Europe have plunged on the growing risk of a Grexit. Greece will be meeting with its creditors on April 24th and unfortunately no deal on releasing the bailout funds will be reached. While this would not be a surprise the mere reality could still weigh on the currency. The bottom line is that we expect the 1.1040 to 1.05 range in EUR/USD to remain intact for the time being with the move above 1.0850 likely to be a near term top.

GBP/USD Holding 1.50 Resistance

The 1.50 level has once again proven to be formidable resistance for GBP/USD. Even though the currency pair raced above the psychologically significant resistance level for the first time in nearly a month, hitting a high of 1.5054, it ended the day below 1.50. Considering that economic data did not support the move and the currency pair unwound its gains almost as quickly as it incurred them, the rally was driven by stop hunting and not a fundamental shift in the market’s appetite for pounds. This morning’s U.K. labor market report was slightly weaker than expected with the claimant count falling by 20k instead of the forecasted 29k. The unemployment rate also held steady instead of improving while average hourly earnings growth slowed to 1.7% from 1.9%. While the data was weaker than anticipate it wasn’t terrible. According to our colleague Boris Schlossberg, “the UK economy continues to show steady progress with unemployment rate now the lowest since the pre-2008 credit crisis as labor conditions remain far better than on the Continent. Although the data didn’t quite match the market expectations, it was good enough to provide relief for traders concerned about the UK election coming up in early May. Cable has been under relentless pressure over the past month on political rather than economic concerns as fears have risen that the Torries may lose their grip on power allowing much less market friendly Labor government to take over. However the latest labor data should provide a small boost to Torries as it shows that the recovery remains on track.”

CAD: Hot Inflation and Spending Data

After enjoying strong gains this week, the Canadian dollar traded lower against the greenback despite better than expected inflation and consumer spending data. Consumer prices rose 0.7% in the month of March, which was not a big deviation from the 0.6% forecast but core prices doubled expectations, rising 0.6% in March. The big surprise was in retail sales, which rose 1.7% in February, more than 3 times stronger than economists had anticipated. International securities transactions also increased, signaling more investment into Canadian dollar denominated assets. These broad based improvements reinforce the Bank of Canada’s optimism and our view that USD/CAD has peaked. Even though the loonie pulled back today as oil prices ticked slightly lower, the price of crude is 30% higher than where it was in February and all signs point to a recovery in Canada’s economy. So we now view Friday’s rally in USD/CAD as an opportunity to sell at a higher level. No economic reports were released from Australia or New Zealand but AUD gave back part of its gains while the New Zealand dollar extended higher.